Rarely does one get a peek behind the curtain in the secretive and highly profitable world of third-party litigation funding (TPLF). In fact, there’s such little transparency in the TPLF industry that in the few instances when information does make its way into the public domain, it’s extremely illuminating.
For those that have been closely following this investment approach, there has been a substantial increase in TPLF in recent years and, left unchecked, the industry will unquestionably continue to grow at a rapid pace. In 2021, it was a $12 billion industry here in the U.S. And globally, TPLF is already estimated to reach a staggering $30 billion by 2028.
Considering the general lack of transparency in this multi-billion dollar industry, I was surprised to come across investor presentations online (here and here) from Tecumseh Alternatives LLC, which invests heavily in litigation finance. These presentations – in litigation funders’ own words – show how investors are exploiting the legal system for their own profit and underscore the need for better transparency and oversight of this booming industry.
One of the main reasons hedge funds invest heavily in litigation finance is because, as Tecumseh notes, it is “not generally affected by changes in economic cycles” and that “returns potentially benefit from downturns in the economy as IP owners seek to divest patents to generate additional cash flow.” Tecumseh also makes sure to stress for their investors that TPLF has an “attractive risk-reward profile.”
The Tecumseh presentation shows why patent litigation finance has become so attractive to investors, with nearly one third of all new U.S. litigation finance investments directed towards patent litigation in 2021. The IP Fund materials note that “potential gains from settlement or trial can be substantial relative to the invested capital” and that IP EDGE, which is a sub-advisor to the fund, “has returned over 3x the money it has invested in patents in the 2015-2021 time period with no down years.” (IP EDGE, in case you missed it, has most recently drawn attention for its attempts to hide its involvement in a series of District of Delaware patent litigations.)
Additionally, the investor deck highlights that “IP EDGE is the most active non-practicing entity in the US” with “an existing, identified pipeline of $195 million of patent monetization opportunities across domestic and foreign corporations, individuals and other patent holders.” The presentation deck specifically says that IP EDGE will go so far as to negotiate the purchase of a patent, assist in selection of external counsel to assert infringement claims, and assist in settlements. This isn’t about remedying legitimate claims of infringement. Non-practicing entities (NPEsNon-Practicing Entity. A broad term associated with trolls but now disfavored because it includes universities and legitimate technology developers that seek to license technology in advance rather than after a producing company has independently developed it. More), or patent trolls, like IP EDGE don’t make products, innovate, or create jobs – but rather exist only to return profits to wealthy investors.
As I’ve previously written, NPEsNon-Practicing Entity. A broad term associated with trolls but now disfavored because it includes universities and legitimate technology developers that seek to license technology in advance rather than after a producing company has independently developed it. More and litigation funders have also set their sights on the International Trade Commission as a venue to score big. Tecumseh lists the ITCInternational Trade Commission in its highest value for potential claims, and notes that “ITCInternational Trade Commission assertion opens [the] door to alternative enforcement strategies.” While the ITC’s mission is to investigate and protect American businesses from unfair trade practices, it’s now being manipulated by NPEsNon-Practicing Entity. A broad term associated with trolls but now disfavored because it includes universities and legitimate technology developers that seek to license technology in advance rather than after a producing company has independently developed it. More and litigation funders to make windfall profits for their investors.
For innovation to thrive, we cannot allow this type of brazen manipulation of our patent and legal system. Both Congress and individual judges should explore policies that would require more transparency from the litigation finance industry. The American public deserves to know who is behind these abusive lawsuits that target American innovators.